An EPA Interpretation and its $9.6 Billion Per Year Price Tag

The Supreme Court ruled this week that the Environmental Protection Agency (EPA) misinterpreted the Clean Air Act when it deemed cost irrelevant to its decision to regulate mercury levels in power plants.

This is a victory for common sense regulation, and for Americans who object to government agencies spending consumers’ money as if it were free.

In a 5-4 opinion written by Justice Antonin Scalia, the majority sided with petitioners (electric utilities and 23 states), who argued that the EPA acted improperly in setting 2012 “mercury and air toxics standards,” without considering the US$9.6 billion per year price tag.

Appropriate and necessary

The key statutory phrase in Section 112 of the Clean Air Act, which authorizes the EPA to regulate to control hazardous air pollutants, including mercury, is whether the standard is “appropriate and necessary.”

In setting the 2012 standards, the EPA interpreted this phrase as not requiring it to consider costs. The majority of the court disagreed, observing, “[o]ne would not say that it is even rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.”

The majority observed that the EPA valued the benefits of the reductions in mercury emissions at $4–$6 million per year. It also noted that “the costs to power plants were thus between 1,600 and 2,400 times as great as the quantifiable benefits from reduced emissions of hazardous air pollutants.”

As I noted in an earlier piece, the primary health benefits the EPA calculated result from reducing mercury emissions, which, when deposited in water can accumulate in fish and affect the IQ of children who consume large amounts of fish. The EPA puts a dollar value on the change in IQ, ranging from $500,000 to $6.2 million per year.

In a dissent joined by three other justices, Justice Elena Kagan agreed that “[c]ost is almost always a relevant – and usually, a highly important – factor in regulation.” However, she argued that the EPA did consider costs, but at a later stage in its rulemaking.

The dissent also emphasized that the EPA’s regulatory impact analysis “estimated that the regulation’s yearly costs would come in at under $10 billion, while its annual measurable benefits would total many times more – between $37 and $90 billion.”

Calculating benefits

The discrepancy between the benefit estimates emphasized by the majority opinion ($4-$6 million) and the dissent ($37-$90 billion) is interesting.

The larger figures depend on “co-benefits” or “ancillary benefits,” which derive from reductions in nonhazardous emissions of fine particles. These are not the focus of this regulation, and the Clean Air Act elsewhere authorizes the EPA to regulate them more directly (and more cost-effectively).

The court ducked the question of whether the EPA acted appropriately when it stretched its authority in order to consider ancillary benefits while simultaneously ignoring consideration of costs.

Even if the EPA could have considered ancillary benefits when deciding whether regulation is appropriate and necessary — a point we need not address — it plainly did not do so here.

In a concurring opinion, Justice Clarence Thomas raises broader questions about “unconstitutional delegations we have come to countenance in the name of Chevron deference.”

What EPA claims for itself here is not the power to make political judgments in implementing Congress’ policies, nor even the power to make tradeoffs between competing policy goals set by Congress… It is the power to decide – without any particular fidelity to the text – which policy goals EPA wishes to pursue.

Setting a precedent

While the Supreme Court’s decision may not directly affect EPA regulations authorized by other sections of the Clean Air Act, which do not share the “appropriate and necessary” language (such as the upcoming “Clean Power Plan” rules), this decision may set a precedent.

Both Justice Thomas’ concurrence and the majority opinion signal a reduced willingness to defer to the EPA’s interpretation of its statute. The court’s focus on the statutory text, and the agreement among all justices that costs are an important consideration, signal to agencies that “absent contrary indication from Congress, an agency must take costs into account in some manner before imposing significant regulatory burdens.”

The court notes that “‘cost’ includes more than the expense of complying with regulations; any disadvantage could be termed a cost.” In addition, it rejects the EPA’s interpretation that “precludes the agency from considering any type of cost – including, for instance, harms that regulation might do to human health or the environment.”

Who really bears the cost burden?

In this case, the incidence of regulatory costs will fall not on power plants but ultimately on households and individuals, who will face higher electric bills. These price increases could have a significant negative impact on the health and welfare of families, particularly those with low incomes.

Not only will these increases directly affect the affordability of such things as heat and air conditioning. Higher electricity prices will also increase the costs of food and other goods, diverting scarce family resources from priorities such as their children’s education or health care.

As the court concludes, “No regulation is ‘appropriate’ if it does significantly more harm than good.”

Nouriel Roubini, a.k.a. “Doctor Doom”, is chairman of Roubini Global Economics and professor of economics at New York University’s Stern School of Business. Roubini has been consistently cited as one of the world’s top global thinkers. This year, he was voted as the most influential economist in the world by Forbes magazine.